Wall Street reeled on Monday as Chinese AI startup DeepSeek unveiled a groundbreaking AI model, raising concerns about U.S. dominance in the artificial intelligence sector. The tech-heavy Nasdaq Composite (IXIC) plunged 3.2%, with the “Magnificent Seven” — Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOGL, GOOG), Amazon (AMZN), Meta (META), Tesla (TSLA), and Broadcom (AVGO) — bearing the brunt of the sell-off.
Nvidia, the reigning leader of the U.S. AI boom, saw its shares drop 17% as investors questioned the sustainability of its AI-driven growth. Other major players in the AI space followed suit, with Broadcom tumbling 12% and Microsoft losing over 2%.
DeepSeek Challenges U.S. AI Dominance
DeepSeek's newly launched AI model boasts unprecedented efficiency, using far fewer resources than models developed by OpenAI and other U.S. leaders. This announcement has raised the stakes in the global AI race, leading investors to reevaluate growth assumptions for U.S. tech companies.
“DeepSeek’s innovation is a tangible wake-up call,” said Callie Cox, chief investment strategist at Ritholtz Wealth Management. “When expectations are sky-high, even one skeptical headline can knock the market off its axis.”
The news is particularly significant as it comes just before a critical Big Tech earnings season, where expectations for sustained AI-driven growth remain a key pillar of market optimism.
The Magnificent Seven: A Shaken Pillar of the Bull Market
For over a year, the Magnificent Seven stocks have been the driving force behind the S&P 500’s gains, with their earnings outpacing the broader index by a staggering 30 percentage points in 2024. This group alone comprises nearly 40% of the S&P 500’s market cap, underscoring their critical role in sustaining the bull market.
However, DeepSeek’s breakthrough is causing investors to question whether these companies can maintain their rapid growth. Nvidia, for example, has been the poster child of AI infrastructure, with its chips powering everything from data centers to advanced AI applications. But Monday’s market action suggests that Nvidia’s dominance may no longer be unassailable.
Broadcom and Microsoft, both heavily invested in AI, also felt the impact, as concerns about new competition and slowing demand began to weigh on sentiment.
Big Tech Earnings on Thin Ice
The timing of DeepSeek’s announcement couldn’t be more critical, as Big Tech gears up to report earnings this week. Analysts expect the Magnificent Seven to post earnings growth of 21.7% in the fourth quarter, compared to just 9.7% for the rest of the S&P 500.
Yet, these expectations are now under scrutiny. Goldman Sachs research indicates that while earnings growth for the Magnificent Seven is projected to accelerate later in 2025, any disruption — such as increased competition from DeepSeek — could derail this trajectory.
As Venu Krishna, head of U.S. equity strategy at Barclays, noted, Big Tech’s earnings growth is "likely to remain as critical of an EPS growth driver for the S&P 500 as the group was [in 2024].” However, Monday’s sell-off highlights the market’s vulnerability to shifts in AI leadership and sentiment.
Looking Ahead: Challenges and Opportunities in AI
The tech sector’s heavy reliance on AI growth has left it exposed to disruptions like DeepSeek’s rise. While this week’s earnings reports will provide more clarity on how U.S. companies plan to address competitive threats, the long-term implications of DeepSeek’s innovation remain uncertain.
Investors will also be closely monitoring other factors, including trade tensions and Federal Reserve policy, which could add further volatility to the market. As the AI landscape evolves, the question for Big Tech is no longer just about growth — it’s about maintaining dominance in an increasingly competitive global market.
For now, DeepSeek’s announcement has sent a clear message: the AI race is far from over, and the U.S.’s leading players are no longer running unopposed.
